Volume 11(2): 187–210
ISSN 1350–5084
Copyright © 2004 SAGE
(London, Thousand Oaks, CA
and New Delhi)
Institutional Forms and
Organizational Structures:
Homology, Trust and Reputational
Capital in Professional Service Firms
articles
Gerard Hanlon
University of Leicester, UK
Abstract. This paper examines how professional service firms have used
a combination of clan and bureaucratic control techniques to manage
change over a 100-year period. Both sets of controls have been present
throughout, but the mix between the two has altered to reflect changes in
the broader institutional environment. These shifts create new contradictions that eventually undermine their very success. However, in the
midst of these changes and shifts, the basic institutional features of
homology, trust and reputational capital have continued to structure
these professional arenas. Key words. institutionalism; professional
service firms; reputational capital; trust
Simmel, amongst others, highlighted some fascinating contradictions
within society—for example, the liberating and constraining consequences of a shift towards the use of money (Simmel, 1991a) or the fact
that, for him, style represented something of a contradiction between the
unique and the general (Simmel, 1991b). In many ways he was captivated
by the study of opposition and the pull in different directions that a
phenomenon could exert on social activity (Naegle, 1958). As with all
great social theorists, it was the social wrinkle that drew him. Like Marx,
Weber and Durkheim, the discovery of contradiction was used to shed
light on social forces. In a much more prosaic and minor way, this paper
wishes to examine a seeming opposition; namely, how professional
service firms have managed to combine the use of the somewhat
opposing techniques of bureaucratic and clan control. Such combining
has enabled these firms to adapt to and ride different social waves in their
DOI: 10.1177/1350508404041613
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Organization 11(2)
Articles
successful bid to maintain and improve their social position (on the
successful adaptability of professionals, see Ackroyd, 1996).
To throw some light on this issue we need to examine control within
these firms historically. This paper provides an analysis of elite accountancy and law firms over the past 100–150 years. It does this by using a
combination of Ouchi’s (1980) clan, bureaucratic and market control
mechanisms and the work of Hinings et al. on professional service firms.
The paper suggests that the preponderance of any one strategy is closely
related to changes within the wider social structure and the need to
maintain the socially constructed characteristics of trust, homology and
reputation that are necessary to the selling of these services in the
marketplace. No one strategy has ever been used exclusively, and the
preponderance of any particular strategy only temporarily solves
organizational difficulties before giving rise to new contradictions and
control dilemmas that oftentimes reflect changes at a broader institutional level.
What follows concentrates on the largest legal service and accountancy
firms and in many ways treats both as organizationally one and the same.
This is a somewhat suspect endeavour as there are real differences
between the two, but for our purposes the organizational similarities,
which are well documented (Flood, 1996; Anderson-Gough et al., 1998;
Brock et al., 1999), will be stressed.
Ouchi (1980) suggests that organizations arise in order to control the
diverse range of individuals lodged within every collectivity with an
economic goal. As is well known, he highlights three mechanisms for
delivering such control: markets, bureaucracies and clans. He describes
a clan as an organizational form that relies on the socialization of staff
to ensure that the organization’s goals and those of the individual are
closely matched. Unlike bureaucracies (Coase, 1937; Blau, 1970) or
markets, clans do not measure individual output, use individually derived efficiency as the primary organizing principle, develop
extensive formalized rules or create an extended hierarchy with a
legitimate authority structure. Indeed, in opposition to both bureaucracies and markets, rewards are distributed within clans on a nonperformance basis, indicating a perhaps more socialized understanding
of control.
In contrast, bureaucracies and markets measure and exhibit more direct
control. Bureaucracies set down formal rules and dictate ways of
behaving, and autonomy is limited because staff are often not trusted to
use their discretion well. Similarly, markets assess and value the direct
contribution and utility of an employee. Thus the clan form is qualitatively different and in some senses in opposition to bureaucracies and
markets because it assumes autonomy and suggests that discretion on the
part of employees will be used ‘properly’ and to the organization’s
benefit.
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Institutional Forms: The Long-Term Centrality of the Clan Structure
Ouchi’s work on control is important to the study of professional firms
because it has been argued that historically they have been organized as
clans (Hinings et al., 1991: 377). This paper will argue that such a
statement is only partially true. What follows demonstrates how these
firms used a mixture of controls for most of the 150 or so years of their
existence. Certainly they have relied on the elongated socialization of
personnel, but they have also made extensive use of bureaucratic controls
through, for example, the measurement of value added and income
generation as a legitimate source of authority. Indeed, professional service firms regularly engaged in internecine blood-letting as partnership
agreements were rewritten to take account of the different performance
results and/or value added of different individuals. For instance, the
major law firm Linklaters and Paine renegotiated its partnership agreement at least three times between 1863 and 1881 to reflect the different
performances of partners (Slinn, 1987: 30–57). Other law firms such as
Freshfields (Slinn, 1984) and Cravaths in the USA (Swaine, 1946) and
major accountancy firms such as Thomson McLintock (Winsbury, 1977)
or Brown Fleming and Murray (Jones, 1981) also measured performance
and readjusted agreements accordingly.
However, despite the measuring of individual performance and the
periodic blood-letting that went with it, it is fair to say that the socialization aspect of the clan form has been central to the survival of
successful firms and to their ability partially to create and shape their
market environment. In the past, clan control was exerted through family
and friendship ties and long periods of socialization into the firm. Thus
these firms employed family members,1 married into other professional
and/or client organizations, sent children to the same elite schools as
other high-status professionals and/or clients, and generally socialized
their family and staff members into a milieu of networks wherein status
and reputation were paramount and based upon one’s ability to fit in (a
process that was umbilically tied to class—see Waters, 1995; Runciman,
1993; Fulcher, 1995; Corfield, 1995).
One demonstration of this is the law firm Freshfields, where senior
partners sent their children to Trinity College Cambridge to mix with the
children of clients such as the bankers Hambros, Rothschilds, Barclays,
Lloyds and so on (Slinn, 1984: 111–138). These male children then
entered the firm and, when they were made partner (if not before), were
introduced to the Governor of the Bank of England in an attempt to boost
the strength of the firm’s relationship with its most important client. Such
processes embedded them in a milieu of networks within the financial
services arena of which the Bank of England was the central point.
Freshfields’ partners (and those in other firms) were also expected to be
active in City life, to take up directorships, encourage family and friends
into complementary occupations (for solicitors this often entailed a
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brother joining the Bar), perform charity work (a role often reserved for
the wives of partners), etc. (Slinn, 1984, 1987; Jones, 1981; Winsbury,
1977). These processes were aimed at breaking down the barriers
between working and (elements of) private life and they sought to
socialize personnel into the firm, thereby ensuring that its goals and
theirs were closely aligned.2 Such policies were combined with the
‘Cravath system’ (see Swaine, 1946: 1–25), whereby staff members
deemed unsuitable for partnership were pressured out of the firm at an
early stage.3 These clan strategies ensured that firms were inhabited and
dominated by individuals who shared the values of the organization and
who were located within the same social space as each other, their
professional rivals, clients and potential clients. Being placed within
such an environment encourages people to engage in what Mannheim
(1940; 51–8) calls self-rationalization; i.e. it facilitates self-prescriptive
regulation of one’s actions and ideas. Such a process provides a code for
one’s behaviour and was integral to the commercialization of the self that
typified many aspects of the middle class in the 19th century (Newton,
1998).
Furthermore, this clan structure induced homology and trust-based
partner autonomy and enabled the creation of networks. Partner autonomy is an essential element of professional service markets because it
allows partners to act entrepreneurially and to develop incomegenerating relationships with clients (Hinings et al., 1991). It is difficult
to manage such relationships centrally because the delicacy of the
product means trust is essential to selling it. For example, financial or
legal details about future client plans, restructurings, raising of finance,
etc. were (are) vital elements in the survival and growth of client
businesses, so providing such details to an adviser entails an act either of
trust4 or of desperation. In these conditions, trust is created through copresence, familiarity, face-to-face contact and so on (Giddens, 1991;
Fukuyama, 1999). These features mean markets are necessarily constructed around shared values, understandings and predictability. This
puts relationships and/or reputational capital at the apex of selling
complex products in professional markets and, in turn, these relationships and reputations are built on partner autonomy because this allows
for the co-presence, flexibility and tailoring of the service upon which
trust is based. As with any era (but perhaps especially during this statusconscious period—see Waters, 1995; Newton, 1998; Corfield, 1995), trust
was further developed because the social exchange took place amongst
(relative) equals (an important factor in trust-based exchange—see
Homans, 1961). Trust was important both to clients and to professionals.
For clients it lessened the possibility of malfeasance, whereas for professionals, as we shall see, it introduced elements of stability into the
marketplace, it helped to open up new markets to them and it enabled
them to at least partially frame and control some social spaces. Such
developments both facilitated and were facilitated by a clan structure.
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However, a clan structure does not mean that partner autonomy was
complete. Like all economic autonomy it was embedded within the rules
of exchange or agreed norms that shape a market as a social construct—
that is, the collective formal and informal agreements on how business
should be conducted, who can deal with whom, how pricing mechanisms
are arranged, how new business is generated, how a business relationship
is terminated, etc. (Fligstein, 1996; Baker et al., 1998). Without these
informal rules unpredictability could emerge thereby diminishing trust.
The rules of exchange change over time but, as Stinchcombe (1965) pointed
out, such change often leaves the original institutional forms of a marketplace intact. For professional service firms, as we shall see, these institutional forms centred on the importance of homology, trust and reputational
capital. These features have remained constant and have shaped the
control strategies adopted by these organizations.
‘Cohesive Competitive Professionalism’: An Institutional Form?
1850–1920
Professional service firms were organized around what could be called
‘cohesive competition’ from the latter half of the 19th to the early 20th
century. As described above, these firms operated in a market closely
regulated through shared understandings and social ties. Markets were
expanded, new products created and businesses grown through the close
ties, shared values and trust developed with clients. For example, lawyers
used their conveyancing skills and their intimacy with landed property
transactions to develop detailed knowledge of the finances and personal
circumstances of wealthy individuals and families in the 18th and 19th
centuries (Offer, 1981: 23–34; Anderson, 1992). As the use of land as
security for mortgages grew, lawyers became increasingly central figures
in financial services. Anderson (1972) and Miles (1984) both highlight
how lawyers used their closeness to wealthy clients to act as commissioned middlemen and brokers between lenders and borrowers. In many
respects, they acted in ways similar to banks (Offer, 1981; Mathias, 1983:
132–59). These relationships with clients, combined with solicitors’
centrality in property markets, enabled them to become important figures
in the emerging rail- and canal-building exercises that were so important
to capitalism’s development. They structured the purchasing of the land
necessary for such projects, they negotiated the antiquated rules for
establishing these companies, they steered the Bills needed to create
these canal and rail firms through Parliament and finally, as these new
companies created new problems (and hence new legal markets), they
provided solutions to their resolution, e.g. industrial accident compensation (Sugarman, 1994).
Through providing these services they actually framed social spaces.
For example, industrial accident compensation was much narrower and
stricter in the UK than on Continental Europe and this was partly because
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solicitors (and others) were closely aligned with capitalists and provided
advice to both them and the legislature, thereby shaping this domain in
ways that supported the cause of ‘profitability’ at the expense of ‘safety at
work’ (Perkin, 1970; Mathias, 1983). Any changes to these areas would
therefore have to dismantle a framework that lawyers and others had a
vested interest in maintaining. These frameworks structured the markets
that professionals had helped create and in which they had been deemed
‘expert’. It seems then that lawyers used their existing markets, their
knowledge and networks and their position as trusted advisers to build
new markets and develop new knowledge and networks. The development of these institutional structures was enabled by the socialization
procedures and structured partner autonomy that existed in these firms
and that operated within an environment of homology, reputation and
trust.
In short, being embedded in a social space around land enabled
lawyers to respond to client need or perceived need and to take advantage of emerging social spaces, and indeed to forge new ones. Markets did
not simply appear; they were made and captured, and the organizational
forms adopted by solicitors enabled them to do this in some arenas. For
example, there was no pressing technical reason why solicitors (and not,
say, barristers) engaged in the conveyancing deemed necessary to build
canals and railways in the early and mid-19th century. Solicitors performed this task because they had contacts with the (often) regional
businessmen who dominated transport (Mathias, 1983: 252–65; Perkin,
1970: 77–95) and because they traditionally embraced business and
client need as well as acting entrepreneurially. All of this meant they
could exploit contacts and the advantages they brought. A clan structure
based on socialization and networks, combined as it was with the
bureaucratic measurement of both value added and income generated,
encouraged solicitors to: one, get close to clients and gain their trust and,
two, develop business from such proximity in order to advance their
individual careers. On the other hand, barristers, who were also obvious
candidates for much of this work, actively sought to distance themselves
from direct contact with clients, remained self-employed rather than
combine in firms, cultivated contacts with solicitors rather than other
groups and concentrated themselves in London both because the courts
were centralized there and because they could avoid direct client contact,
thereby enhancing their non-commercial nature and hence ‘respectability’ (see Kirk, 1976: 171–6). Such organizational decisions ensured
that, when these new legal markets were still potential markets, barristers
did not see the emerging opportunities—or, if they saw them, did not
avail themselves of them—whereas solicitors did. Such vision enabled
solicitors to exclude other groups by dominating these markets (for
professional exclusionary tactics, see Armstrong, 1985; Abbott, 1988).
In this professional world, markets and organizational forms are interlinked. Markets are probably best viewed as city landscapes with numer-
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ous zones or locations that are being gentrified, in decline, being
constructed, and so on, depending on their place in the city firmament.
Each zone represents a different market. Like a city, these arenas are
organic; they grow, decay or rejuvenate depending on the care and
attention they receive. This provision or lack of provision is dependent
on resources allocated to a district (market), which in turn is dependent
on who is interested or can be persuaded to be interested in the district
(market). Such a situation requires, first, that one has the social status to
enter the city (market)—a feature the long socialization processes of the
clan model can ensure. Secondly, once in the city (market), one is
exposed to and has to earn the trust of actors who can provide access to
existing districts (markets), to different ones or to the wherewithal for the
construction of new ones, etc.—a feature the clan form can also facilitate.
Thirdly, one has to have an incentive to act entrepreneurially; i.e. to
cultivate and manage the networks and knowledge needed to move
around and create districts—a feature ensured by bureaucratic controls
and the measurement of individual performance. Without the required
social status, access to a market is denied and, once in, access to new/
existing markets may be denied or removed if disapproval occurs and
networks are withdrawn. Such sanctions are invoked if one has broken
the rules of exchange and hence proved untrustworthy.
Thus, these institutionalized markets are informally regulated and
maintain a stability at the base of which are relationships. It is through
relationships and direct or indirect experience that trust is developed.
Such an environment generates homology and stresses reputation. In
many ways these structures create a sacred set of practices in the
Durkheimian sense. That is, the moral code developed puts constraints
on certain forms of behaviour (for example, stressing safety over profitability) whilst encouraging other practices as ideal types of behaviour (for
example, increasing client profitability above all else) (see Naegele,
1958). To avail oneself of opportunities, one has to be ‘one of us’. Put
simply, one has to engage in self-rationalization and self-proscribe nonacceptable behaviour.
Three things are notable about this situation. First, existing markets
and networks beget new ones. But these areas are not the neutral markets
of liberal thought (Gray, 1986); it is better to think of them as social
spaces in which goods and services are bought and sold and frameworks
for social activities are put in place, thereby securing power for some
groups in the emerging milieu because the rules that regulate these
spaces reflect the interests of those dominant in the marketplace. Such
markets have important consequences because the state, capital and other
parties act in ways that are at least partly structured by these rules. For
example, differences in industrial compensation legislation between the
UK and Continental Europe encouraged capitalists to pay less attention
to health and safety in the UK than in France (Mathias, 1983: 252–65).
Secondly, trust and reputation are essential because professional access
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to these markets and the social frameworks they create are reserved for
those groups and individuals who exhibit the ‘right’ values. In such an
environment, personal networks, trust and the market were (are) intimately interlinked. Because these professional markets shaped key
activities within capitalist societies through their framing and regulating
of power, they were deeply embedded within a social space that was
sealed by factors such as class, gender, social status, and exposure to
clients and potential clients via family and friends. These were highly
structured and embedded markets that partially shaped a wide range of
social activity. Thirdly, a mixture of clan and bureaucratic structures
helped ensure the establishment of trust and reputation, because the
autonomy and contacts necessary to establish trust, the weeding out of
the ‘untrustworthy’, and the incentives to exploit networks entrepreneurially were all present.
The relationship between this organizational structure and the market
was mediated by what Ranson et al. (1980) call interpretative schemes.
Essentially, these are an ideological way of understanding and valuing
how work was/is organized, who carries it out, and why it was/is done
this way. The interpretative scheme for this world suggested partners
were expected to expand the business via individual entrepreneurial
endeavour based on networking and reputation, and they were rewarded
via ‘eat what you kill’—i.e. on the basis of the amount of revenue
generated. This ideology reinforced practices that encouraged a fluid
view of what lawyering or accountancy were about. They were not seen
as professional activities tied to specific specialist areas such as auditing.
Rather they were entrepreneurial exercises that were in many ways
(although not completely) driven wherever the market and opportunity
led them. The interpretative scheme reinforced structures by facilitating
an organizational form, a market culture and shared values that endorsed
entrepreneurialism, market-building, and organizational blood-letting
and restructuring as a partner’s star rose or waned. However, successful
firms were also cohesive in that family members and friends were
introduced into the firm, socialization processes were long and entailed
both pre- and post-employment socialization, networks were built and
solidified, and many groups were excluded from both these firms and
these markets, thereby strengthening similarity amongst producers
and consumers. All of these features made the sphere homologous at a
crucial point in the development of capitalism and helped to shape much
social activity (Perkin, 1989).
‘Collegiate Professionalism’: Strengthening the Clan Form?
1920–1980
The institutional setting mapped out above altered in the pre- and interwar period. First, auditing and conveyancing became the dominant
products within accountancy and law respectively, thereby lessening
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occupational fluidity. Solicitors received a monopoly on conveyancing in
1804 and, over the course of the century, it went from providing 20 per
cent of income to becoming the mainstay of the profession (Kirk, 1976:
125–54). In many ways it seems that from the late 19th and early 20th
centuries solicitors retreated into conveyancing and moved out of other
markets as conveyancing became more widespread, more stable as a
market, quicker to perform and more lucrative (Offer, 1981). Elite law
firms moved further into conveyancing while also availing themselves of
their reputational advantages to tighten their hold on the elite corporate
law market. Similarly, accountants became increasingly dependent on
the audit as a fee generator. Again, it was lucrative and a stable, annual
purchase that soon came to dominate fee income. For example, Richards
(1981) suggests that between 1900 and 1915 Touche Ross (now a Big Five
firm) saw receivership replaced by auditing as the main source of fees
and, in comparison with other big firms (see Winsbury, 1977; Jones,
1981), Touche Ross was slow in moving into this area. Thus by 1920
these markets had established themselves as the main sites of fee
generation in law and accountancy.
Accompanying the increasingly concentrated and stable marketplace
was an ongoing separation of providers into high- and low-status producers, thereby further restricting competition. An environment of
ongoing professional–client interactions, client loyalty to their advisers
and the continuance of a dominant kinship control group within the firm
helped to create a stability wherein prestigious clients remained with
certain firms, thereby establishing a status hierarchy. At the bottom of
this hierarchy were individual and small-firm lawyers and accountants
dealing largely with conveyancing, general accounting, wills, personal
tax and so on for individuals and small businesses—the dominance of
this work was reflected in the training laid down by the professional
bodies such as the Law Society until the 1990s (Moorhead and Cushley,
1995).5 Podolny (1993: 831) argues status is a signal of the supposed
quality of a firm’s product or service. In both law and accountancy,
certain firms were seen as producers of high-quality products and hence
they occupied the top of the status ladder (for accountancy, see Winsbury,
1977; Jones, 1981; Richards, 1981; for law, see Slinn, 1984, 1987).
Through a combination of bringing the offspring of partners into these
firms and the appointment of well-connected individuals, certain firms
were reinforced as high-status producers. The market stabilized around a
hierarchy in which prestigious clients farmed out their legal and accounting work to high-status professional firms. As this situation stabilized,
the environment was altered and new rules of exchange were created—
entrepreneurialism waned, personnel movement declined, demarcation
increased and occupational fluidity decreased, kinship and friendship
networks ensured that familial dynasties controlled firms and relationships were increasingly passed on. As a result of all these changes,
attachments with clients shifted from being a client attachment to an
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individual to one in which the client was structurally attached to the
firm. This altered the institutional environment as organizations became
increasingly dominant over individuals.
However, these markets remained socially embedded and the highstatus firms that emerged were sought after by both high-status and
potentially high-status clients as a way of sending signals to important
third parties such as the City. These signals led clients, as befits important firms, to seek out the ‘best’ legal and accounting advice. Podolny
(1993: 831) suggests such symbolism is mutually enhancing to both the
producer and the consumer. As such, the professional firm’s reputational
capital (not any one individual’s) became key to selling professional
advice. Thus relationships remained central but the emphasis shifted
from the individual to the firm. This allowed some law and accounting
firms through their continued embedding in a social milieu of the right
schools, the right clubs, a prestigious and loyal client portfolio, good
appointments, sitting on government committees and so on to insulate
themselves in a high-status, homologous and non-price competitive
market.
These developments were in line with and shaped by the external
environment and the more general growing concentration of capital and
decline of competition as monopoly capitalism established itself (see
Mannheim, 1940; Hayek, 1944; Hall and Schwarz, 1988). Indeed, like all
other organizations, professional service firms had a dialectic relationship with their environment. They were both shaped by and partially
shaped the world in which they were placed. One example of this is their
relationship with the state. The state played a role in creating professional markets in a variety of ways. After the Second World War, the most
important way was possibly through its attempts to concentrate industry,
in the belief that larger firms would act as national champions. Stacey
(1954: 224–30) suggests that at least 20 per cent of the UK’s industrial
capacity was nationalized after the Second World War and that the state
also encouraged private sector mergers in the inter- and post-war periods.
By so doing, the state helped build new markets for professionals (often
after taking their advice on how best to reform existing markets). Professional service firms were central to these processes because they provided the know-how to restructure such organizations and/or nationalize
them; that is, they provided the legal structures, the company articles,
much of the financing expertise, the internal financial control structures
and so on (see Hannah, 1976, for the important role played by professional service firms, in particular McKinsey management consultants, in
the inter-war merger boom). The firms that provided this expertise were
the high-status institutions that were intimately bound up with the state–
industrial–financial milieu of the time and appeared on and before
government committees concerned with such issues (see Slinn, 1984,
1987; Winsbury, 1977; Jones, 1981). Afterwards, these firms were used by
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the newly created organizations to provide legal and accounting advice
in a manner somewhat akin to a gamekeeper turned poacher.
Thus by the inter- and post-war period the markets within which these
elite firms operated changed: they became more concentrated around
corporate law, land and auditing; they became more concentrated in
terms of clients; they generated a status hierarchy; and they became
mature, with more predictable growth patterns. However, they remained
heavily socially embedded. In short, homology and trust gave certain
firms access to networks that begot new markets, concentrated existing
markets and created a status hierarchy. In the light of these external
developments, leading partners responded to ensure that organizational
structures and interpretative schemes were suitably altered. In this new
environment, two important factors should be noted: first, the individual’s reputational capital becomes less important than that of the firm;
and, second, these changes created a situation in which business did not
need to be pursued as aggressively because entrance to key markets was
restricted. These conditions pulled against the then existing organizational form with its fluid view of markets and its encouragement of
aggressive, largely individual, entrepreneurialism. For the elite professionals in the high-status firm, restricted markets, firm reputational
capital and oligopoly made sense, whereas fluid markets, aggressive
competition and entrepreneurialism could de-couple high-status firms
from clients. As such, high-status firms (amongst others such as clients,
the state, etc.) endorsed changes in the rules of exchange and organizational structures.
Organizationally, structures changed as high-status firms developed
forms based on seniority, rewards were allocated via the ‘lockstep model’,
which was based on time served rather than income generated, collegiality was encouraged rather than the previous individual entrepreneurialism, competition between firms was restricted, there was a
decline in personnel movement between firms, etc. (Hanlon, 1994, 1999).
These organizational developments brought a change in the interpretative schemes used to reinforce structures. Seniority became the key
variable when dividing up partner profits. The value added by an
individual partner was not used as a way of rewarding partners, hence
there was a decline in elements of the bureaucratic model as the clan
structure became even more dominant, with its emphasis on socialization, self-rationalization and rewarding non-performance criteria.
Increasingly, professional work was not about entrepreneurialism,
developing new markets or renegotiating partnership agreements, but
about defending jurisdictions and professional specialist expertise,
becoming a professional firm person, maintaining the high status of the
firm because it was this that brought in clients, and so on (Jones, 1981;
Slinn, 1984, 1987). Such endeavours ensured that the firm, not the
individual, became the centre of market development.
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However, this period was not all about change. Recruitment was still
highly selective because homology, reputational capital and trust were
still at the institutional core of these embedded markets, which regulated
huge (and increasing) areas of social activity and acted as lubricants for
frameworks of social power (Johnson, 1972; Larson, 1977). As in the past,
social cohesion, self-rationalization and status were vital to being able to
succeed, fit in and engender trust. Not fitting in meant one was still
forced out of the firm under the Cravath system. This is rational because
not fitting in could lead to unpredictability and hence anxiety and risk in
the marketplace. In short, homology and shared values were still king. So
the organizational structure changed as the market changed and the
interpretative scheme altered accordingly (although the causal flow was
not simply one way; all three spheres—market, organizational form and
interpretative schemes—had a dialectic relationship), but trust, homology and reputation remained at the core of these markets and central to
the way in which the organizational structure changed.
‘Commercialized Professionalism’: Bringing Bureaucratic Controls
Back In? 1980–Present
Yet again, within these professional service markets the institutional
form has altered as the rules of exchange shift and new organizational
structures and new interpretative schemes come about. However, as with
previous transitions, central aspects of the old features have remained, so
change has not been complete. The stable features are once more based
around the centrality of relationships and the perseverance of homology,
trust and reputation. So what are these changes and why did they come
about?
One change concerned the fact that in the 1960s and 1970s UK
corporations came to be increasingly dominated by a new stratum of
professional managers rather than family owners (Hannah, 1976) and this
management stratum slowly instituted more rigorous purchasing policies
in professional and other services. This process challenged the existing
rules of exchange and led to a significant shift in client behaviour. This
change threatened long-term client loyalty to firms and hence potentially
the status hierarchy. With changes in the external environment such as
the recession of the 1970s and the shifts in corporate behaviour that
followed in its wake, professional service firms were pressured into
altering their own practices. The most important features of these
changes were the reintroduction of price competition and demands that
professionals respond to client needs in a more proactive way (Baker,
1990; Baker et al., 1998; Rosen, 1989; Grey, 1994; Anderson-Gough et al.,
1998, 2000; Brock et al., 1999). This meant that the rules of exchange
shifted and features such as what the service was supposed to entail, how
it was costed, and how and to whom work was allocated were
renegotiated.
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The state was another factor in this change. The state set about altering
the economic environment, which in turn transformed the professional
service world. It pushed for a more open international economy and set
about re-regulating financial services, denationalizing assets, reshaping
employment legislation, restructuring the welfare state, encouraging
inward investment, attacking professional monopolies, etc. (Jessop,
1991). These processes had a wide-ranging impact upon professionals in
a variety of spheres, although of particular concern to this paper is the
impact they had on elite legal and accountancy firms. From the point of
view of the large professional service firm, the impact has been very
positive (Lee, 1992).
Re-regulation of financial services and their general expansion have
created a lot of work for lawyers and accountants (Flood, 1996). For the
top law firms, financial services now account for roughly 65 per cent of
their fee income, over half of which is gleaned through overseas work
(London Economics Ltd., 1994). The accountants have also benefited
from these developments. For example, accountants and lawyers were
heavily involved in the denationalization of much of UK industry (as
they were in its nationalization) and have used their UK experience as a
marketing device to develop markets in Eastern Europe and other regions
(Martin, 1993; Wedel, 1998). The sums involved in denationalization are
colossal (Marsh, 1991). Between 1990 and 1997, gross proceeds from the
UK privatization programme amounted to US$64 billion, and globally the
figure is US$583 billion (OECD, 1999). Evidence from the flotation of
Railtrack and the privatization of the electricity industry suggests that, in
the UK, professional service firms receive between 2 and 3 per cent of
gross proceeds. This means that for the UK they have received roughly
US$1.8 billion and, assuming such figures can be translated to the world
economy, professionals potentially made US$14.5 billion.
In the case of Railtrack, for example, £39 million was spent on
advisers, marketing services and sales commissions (National Audit
Office, 1998: 69). Lawyers (the firm Linklaters and Paine) received £3.6
million and accountants (Deloitte and Touche and Ernst and Young)
received £1.9 million between them. The sale of the electricity industry
netted professional service firms £191 million in fees (National Audit
Office, 1992: 23). Again, the major law firms (in this case Slaughter and
May) and accountancy practices (all of the Big Five except Arthur
Andersen) were represented. All of this is despite the fact that the House
of Commons Public Accounts Committee estimated that the electricity
sale was undervalued by £1 billion (Martin, 1993: 89). It has also been
estimated that the sales of British Aerospace, British Telecom and British
Gas netted professional service firms £6 million, £152 million and £175
million, respectively (Martin, 1993: 90). Such developments are important
because during the 1980s consulting fee income spent by the state grew
by 31 per cent in the USA and by 47 per cent in the UK (Martin, 1993:
88). Thus the neo-liberal push to an internationally open economy with a
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denuded state sector has benefited these firms and enabled them to build
new regulatory frameworks and markets for regulating and structuring
these new spheres. They were able to embed themselves in an emerging
and rapidly growing (global) market. This market would be made up of
new companies needing the regulatory expertise these professional service
firms were well positioned to provide as they once again moved from
gamekeeper to poacher. Dezalay and Garth (1995) have suggested that
these firms are engaged in creating the rules of the global economy
through advising and lobbying national and international regulatory
agencies such as the European Union, the World Trade Organization and
the International Monetary Fund, and then using their knowledge of the
social space they have helped create to advise private business and other
clients on how best to negotiate the new terrain. Indeed, Wedel (1998:
45–83) argues that in Eastern Europe it is even more pernicious than this
because these firms have created rules for economic activity and privatized
large amounts of economic resources in ways that are favourable to their
Western clients—with whom they have relationships based on trust and
economic advantage. As in the past, new social spaces and markets are
being configured and these frameworks of power are partially shaped by
professionals who have a vested interest in the new structures. As we
shall see, as in the past, such an endeavour is not doled out to anyone,
thus issues of homology, trust and reputation remain paramount.
These developments created tensions for professional service firms.
Although profitable for these organizations, the changes had to be taken
advantage of, and to do this firms had to alter. For example, clients began
to shop around for advisers rather than simply use their traditional
providers, and the state created new markets, which required new
products and ways of engaging clients. Because of their previous success,
these firms were well placed to take advantage of these opportunities.
However, that very success was built on practices that would have to be
altered if these opportunities were to be exploited. Elite professionals
eagerly created and seized such opportunities. As in previous eras, they
used their location within a social space to see, generate and exploit
markets and potential markets. For example, when the City was reregulated, huge sums of money were earned by many groups (Jessop and
Burgi, 1991). Lawyers and accountants were one such group. Lawyers
actively put resources into financial services in a bid to provide the
advice and solutions necessary to develop many of the new financial
service products, to take advantage of the new insurance and reinsurance opportunities, and to create the legal infrastructure necessary
to ensure money and shares could move more freely around the globe.
They structured deals to enable international project financing, they
stepped into the breach when new global problems arose such as those
created by the Maxwell pension fund scandal (Flood, 1996), they
facilitated the new mega global mergers and takeovers,6 and so on. Such
changes were beneficial. From figures derived from ICCLAW (1999) and
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London Economics Ltd. (1994), it seems that the firms Clifford Chance,
Linklaters and Paine, Freshfields, Lovell White Durrant and Slaughter
and May saw their staff numbers grow by 78 per cent and their fees by 97
per cent between 1994 and 1999. This growth was accompanied by a
further shift into areas of law that are international (London Economics
Ltd., 1994) and into new or increasingly important areas such as financial
services, banking and intellectual property (Hanlon, 1999: Table 2).
Similarly, the Big Five accountancy firms have grown rapidly and,
indeed, they have expanded into legal services, complicating the legal
services market. Between 1989 and 1999 the fee income of four of these
firms in the UK grew by on average 512 per cent (figures compiled from
Hanlon, 1994, and Accountancy, 1999). Such growth was accompanied
by a well-documented shift out of auditing and into areas such as
management consulting. By 1999 the Big Five accountancy firms earned
twice as much from non-auditing services as they did from auditing,
whereas in 1996 the two were almost on a par (Accountancy, 1999).
Accountants sold the audit as something of a loss leader and used it to
develop and secure new markets in management consultancy, tax, information technology, insolvency and receivership, mergers and acquisitions,
and so forth (Rose and Hinings, 1999). Thus, like a re-run of history, these
professionals used their connections to move from one zone of the city to
another or to regenerate previously neglected zones, and by so doing they
helped shape a social space that empowered certain groups—themselves,
mobile capital, internationally oriented capital—at the expense of
others—the public sector, nationally oriented capital and much of the
labour movement (see Marsh, 1991; Jessop, 1991). Indeed, these firms are
now key players in the firmament of global cities such as London. These
cities act as control and coordinating nodes in the world economy and in
an increasingly post-industrial and polarized labour market. At the apex
of this market are producer services such as investment banking, law,
consulting and information technology (Sassen, 1988, 1991, 1994).
Indeed, to understand the growth of elite law and accounting firms, this
emerging global regulatory role has to be acknowledged and understood
(Hanlon, 1994, 1999). Unfortunately, the ways in which these cities and
the services they provide relate to one another is little understood
(Beaverstock et al., 2000), although data are increasingly being gathered,
especially on migratory patterns (Sassen, 1988; Hanlon, 1996; Beaverstock
and Boardwell, 2000).
So how did the changing market and changing rules of exchange affect
these firms? They encouraged the firms to restructure or perhaps, more
accurately, they encouraged certain elite groups within these firms to
push for restructuring. This led to what Fligstein (1996: 657–63) calls
‘political projects’; that is, the organizational structures and the practices
they encourage or support are reconfigured in light of external change,
which undermines the existing equilibrium and leads to inter-group
infighting. For such pressure to build up and create change, Greenwood
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and Hinings (1996) suggest that a number of features are usually present.
In particular, they stress that organizational resistance to change is
influenced by the strength of the existing interpretative scheme, the
openness or otherwise of a sector to outside influences, and the internal
dynamics of a firm, which will encourage it to fall into or out of line with
the rest of the sector. In the 1980s and 1990s the confluence of a number
of factors made these professional service sectors and the elite professionals within them ripe for change.
As has been highlighted, these firms are open to other sectors. Indeed,
they developed historically through a close interaction with clients in a
variety of sectors from banking to steel to cars and coal. In a chameleon
fashion they used exposure in one sector or firm to sell services to other
sectors and firms; thus they are open to outside influence and respond to
it (Greenwood and Hinings, 1996: 1030). Secondly, the pressure of clients
for change built up from the 1960s and 1970s. It encouraged internationalization and massive merger movements amongst professional
firms (Powell et al., 1999), it encouraged them into new service product
areas such as management consultancy (Rose and Hinings, 1999), and it
slowly undermined their existing interpretative scheme as new and
increasingly powerful groups such as management consultants reached a
critical mass (Rose and Hinings, 1999) and old elite groups realized the
need for change if they were to compete in existing and new markets
(Hanlon, 1994, 1999). Thirdly, although the internal dynamics of these
organizations allowed for differences to emerge between them and,
indeed, between the legal and accounting sectors, the overwhelming
feature is actually the similarity of response.
The old rules of exchange were undermined from within and without
as clients looked for new relationships with professional firms. This
encouraged elite groups within professional service firms to alter their
organizational controls and to change what they expect or demand from
staff and partners. Increasingly, in response to client pressure and to new
opportunities, those in control of these firms demand that professionals
act entrepreneurially, that they provide clients with commercial rather
than professionally driven advice, and that they are fluid and work across
professional boundaries. This means that firms have also moved away
from aspects of the clan organizational structure and adopted more
bureaucratic controls. Thus today, unlike in the era of collegiate professionalism, firms rigorously measure individual performance. Partners’
(and staff) income generation and other contributions are increasingly
measured in both law and accountancy, and those partners deemed to be
under-performing are removed from the firm. Thus the clan-based ‘lockstep model’ is being replaced with a structure that bears more than a
passing resemblance to the more mixed ‘eat what you kill’ model from
yesteryear.
There are other similarities with the past. Homology, reputation and
trust remain crucial to this new environment and they continue to shape
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structure. They are still key features of these markets and are still located
within the largest high-status firms. However, they are also increasingly
located within the individual in ways that are a throwback (in some but
not all regards) to the 19th and early 20th centuries. Thus reputational
capital and high status gain a firm access to a market, and its ongoing
relationship with many of its clients ensures it is considered as the frontrunner for much work. However, because the market’s new rules of
exchange stress competition (in terms of commercial awareness and often
price) and because potential political projects between commercialized
and more traditional groups are ongoing in these organizations (Rose and
Hinings, 1999), the reputational capital of an individual may be increasingly more central to selling new services. Individual professionals
within high-status firms are often sought out by clients, and/or clients
will follow them if they move (Hanlon, 1999). As a result, the balance of
where reputation lies between the firm and the individual may be drifting
back somewhat to the individual (although it is important not to overemphasize this shift). For example, it is trusted individuals who first spot
and, in many ways, create many of the new markets that have emerged
recently. Marty Lipton from the law firm Watchell, Lipton, Rose and Katz
and Joe Flom from the law firm Skadden Arps are credited with seeing
and developing the hostile transactions business in mergers and acquisitions in the USA (Starbuck, 1993: 900). Similarly, Wedel (1998: 51–3)
argues that David Thomas of then Coopers and Lybrand was able to blaze
the trail for the firm into the East European foreign aid contracts market,
which made up 50 per cent of the firm’s business in Eastern Europe in the
late 1980s and early 1990s, because of his close links with government
officials. These officials trusted him, thereby enabling the firm to develop
the privatization market along lines familiar to them.
Individuals are able to develop business and markets partly because of
their experience in the field, partly because the new rules of exchange
stress close client contact and a detailed knowledge of both the client and
the market sector, thereby giving rise to opportunities to see market
niches and potential new services, and partly because their own reputational capital encourages clients to unlock new opportunities for them
because they trust their skills and ability to deliver. Firms now constantly
encourage individuals to build relationships with other professionals and
clients in an attempt to place themselves in a social space where people
think of them when potential business arrives (Hanlon, 1999). Thus
careers are increasingly driven by market opportunities and are less tied
to jurisdiction and/or professional specialism because individual income
generation is once again used as a rewarding device.
The increased emphasis on individual entrepreneurialism means
fluidity, market development and boundary crossing are central to individual careers. This has some resonance with the era of cohesive competition. All of this means that individuals are protective of the
relationships they have with clients and seek to maintain and exploit
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them rather than simply (loyally) pass them on to the firm (Flood, 1999).
Thus individuals are attached to clients in ways that are similar to those
of the past and there has been an increase in the importance of individual
attachments at the expense of structural ones. This creates a (currently
manageable) contradiction in that the firm may become more vulnerable
to certain individuals, or at least the interests of the individual and the
firm diverge more than was the case under the previous structure (which
was less aggressively entrepreneurial).
Paralleling this have been changes in the interpretative scheme. The
shift towards an ‘eat what you kill’ structure has led to calls from partners
and staff for greater rewards if they are successful at bringing in new
business—so some partners are paid super-profit shares and firms are
lengthening their hierarchies. There has also been a re-emergence of
personnel mobility between professional service firms as the loyalty to
and from the organization supposedly engendered by clan structures
weakens. Thus partners and others are poached, whole teams move
between firms, and firms use the fact that they can hire new partners as a
means of buying in expertise and moving into new markets where they
may be traditionally weak. Such strategies nicely reflect the contradictions in the changing rules of exchange because they undermine staff
loyalty through a more evaluative assessing of staff and an intensified
work environment (see Anderson-Gough et al., 1998, 2000). This
increased mobility for some staff is possible owing to the belief that
clients will follow the individual partner or the team because clients are
at least partially attached to the individual(s). Nonetheless, firms and the
structural attachments between them are still important; if individuals
and/or teams move it is often to other elite firms that are at or near the top
of the entrenched status hierarchy.
All of these changes have facilitated (and been facilitated by) the new
interpretative scheme, which stresses commercial awareness, entrepreneurialism, measuring and rewarding on the basis of individual
performance, etc. However, yet again the change is not complete; these
markets are still based on trust, homology and reputational capital, so
socialization and the clan structure continue to play a role. This means
the market is still heavily embedded and the status hierarchy still exists,
and, if anything, is getting stronger (especially in accountancy). Thus
only certain firms have the reputational capital to ‘perform’ elite tasks,
and when individuals and/or teams move they often move to other high
status firms. So the rules of exchange do not encourage a liberal free
market but rather create an equally embedded new one.
Conclusion: Embeddedness in Professional Service Markets
This paper has highlighted how professional service firms have mixed
the seemingly contradictory ideal types of bureaucratic and clan forms.
The dominance between the two forms has shifted over time but both
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have always been present. The changes in organizational form have a
dialectical relationship with changes in the marketplace and changes in
interpretative schemes. All three areas are important to the structuring of
these institutional spaces. However, although there has been a lot of
change, there has also been a great deal that has remained constant. In
particular, professional service markets and organizational forms are
based on trust, homology and reputational capital. As the wider social
environment alters, these organizations look for ways to adjust. At
junctures of major change the existing organizational forms hamper these
firms and challenge the institutional bedrock upon which their success
was built because what is expected has changed or is being renegotiated.
This renegotiation brings uncertainty and unpredictability, which existing organizational forms and interpretative schemes heighten; hence
change is required. If this change re-establishes trust and predictability
then it exaggerates and facilitates the change in the wider sphere, thereby
contributing to a snowball effect.
Within this institutional setting, shared values are central to the way in
which business is conducted. Networks and trust open up new markets
and potential markets, and they allow professionals to glean knowledge
that is used to sell services to new or existing clients and to spot
opportunities to develop new services and markets. This is not a free
market in the liberal sense; rather, access to and success in these arenas
are heavily influenced by who you are, where you work and have
worked, who you know and how closely you share the dominant values
of the marketplace. Given that these professionals create frameworks for
regulating and controlling economic and social activity, this is perhaps
unsurprising. By their very nature, these frameworks exclude certain
groups. In the past, women and the working class were excluded. Today,
although women, the working class and ethnic minorities are theoretically capable of entering these arenas, they appear to be excluded by the
rules of exchange. For example, Anderson-Gough et al. (1998, 2000) and
Sommerlad and Sanderson (1998) highlight how the socializing necessary
to be deemed trustworthy in accountancy and law practices excludes
women, especially if they have children. Stinchcombe (1965) suggested
that the original features of an institutionalized arena continue to shape it;
professional service markets appear to reflect this and trust, homology,
reputational capital and exclusion are still central to their operation.
Thus, although these organizations are more open now than in the past,
they are not meritocracies. Indeed, they can never be as long as homology, trust and shared values are what these markets are based on,
because some groups either will be seen to reject or will actually reject
the dominant values of this sphere. Given the nature of professional
services and the frameworks of economic and social life they create, these
groups will therefore be deemed untrustworthy. As Durkheim and, more
recently, Bauman (1998) have highlighted, an ‘other’ inevitably has to be
created if a moral code or worldview is to bind a group or society. Like
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the expansion of the middle class in the post-war era (Goldthorpe, 1980),
as these firms grow there is room for more people at the top but,
curiously, less diversity—if we take diversity to mean a variety of values
and practices. Women and ethnic minorities may be promoted, but only
if they undergo a self-transformation (Mannheim, 1940: 57) that allows
them in times of change to self-observe, reflect, internalize and endorse
the newly correct ends. Thus a somewhat contradictory process is emerging, one of widening access accompanied by a tightly circumscribed set of
practices that encourage an entrepreneurial or commercialized worldview.
This is increasing (or at least maintaining) the legitimacy of excluding
those who do not submit (or appear to submit) to this worldview, because
the firms’ seeming openness and widening of access mean it is not at fault.
Rather, exclusion is the fault of the excluded who adopt the ‘illegitimate’
views not allowed in the open but homogenized world of professional
service firms. If replicated on a wider scale, such a process may be
contributing to the greater polarization of the social structure that we have
witnessed over the past 20 years, because claiming to be more open,
inclusive and meritocratic allows the winners to assert that they rightly
deserve their increasing rewards, whereas the losers are seen to lose out
because of their refusal to play by the rules of a game that is now both open
and legitimate (Bauman, 1998).
Notes
1
Between 1800 and 1927 eight male family members became partners in the
elite law firm Freshfields (Slinn, 1984: 55).
2 In many ways this has resonances with current processes highlighted in the
‘project of the self literature’.
3 Although see Flood (1999), who questions the extent to which UK firms
adopted the Cravath model.
4 The importance of trust in these markets was highlighted by Adam Smith
(1976: 122–3) amongst others.
5 These professions were contradictory in the sense that, although they were
divided in terms of social status, they seem to have become more homogeneous during this period. For example, the Law Society came to represent
even more of the solicitors’ occupation in the 20th century than it did in the
19th and the polarization of incomes lessened (Kirk, 1976). It appears that,
although legal professionals operated in different markets, they felt there was
more to be gained by occupational solidarity than by separation. One can
speculate that the elite firms got to dominate the Law Society and hence
represent all solicitors through its dealings with the state, etc., whereas the
less prestigious lawyers got some status from being represented by firms that
worked closely with the government (Sugarman, 1996). However, despite
these developments, the relationship between the elite firms and the rest of
the profession was fraught at times (Kirk, 1976). The accountancy profession
was always more fragmented, although the Institute of Chartered Accountancy
in England and Wales did gain increasing status and power as the 20th
century wore on (Stacey, 1954).
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6
For example, Vodafone’s recent takeover of Mannesmann for over £100 billion
cost £600 million in professional fees (Guardian, 2000).
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Gerard Hanlon is a Professor at the Management Centre, University of Leicester. He has
written widely on professional service firms, the new middle class and the
changing nature of professional work, with particular reference to accountancy
and law. He is currently engaged in an ESRC-funded project on Corporate Social
Responsibility. Address: Management Centre, University of Leicester, University
Road, Leicester LE1 7RH, UK. [email: g.hanlon@le.ac.uk]
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